Purpose: This paper aims at examining the quality of corporate disclosure about
goodwill impairment and its relationship with goodwill write-offs and earnings
performance, exploiting an accounting regulation that allows significant unverifiable
estimates whilst requires a high level of information.
Design/methodology/approach: This study, based on a sample of Italian and British
firms with market indications of goodwill impairment, verifies through a both univariate
and multivariate analysis whether the level of disclosure is positively related to the
magnitude of goodwill write-off and to earnings performance, using a self-constructed
score of mandatory disclosure about goodwill impairment tests in accordance with IAS
36 requirements.
Findings: In a general context of insufficient information, we find that for Italian firms
both the magnitude of goodwill write-offs and earnings performance are significantly
and positively associated to the level of mandatory disclosure about goodwill
impairment tests. For the British firms, as companies more used to impairment test
rules, the data does not confirm any significant association.
Research limitations/implications: The objective of this study is to test the initial
impact of IAS 36 in the first years of its application, selecting a sample of firms
belonging to limited but significant activity sectors. Future research could usefully
analyse a wider sample of firms, also extending the time period of analysis. In any case, the findings of our study are consistent with the insights of earnings management
theory, suggesting that the subjectivity inherent in impairment test assumptions could
be used opportunistically by managers.
Originality/value: This research investigates questions still relatively unexplored,
concerning the effects of goodwill write-offs and accounting performance on corporate
disclosure about goodwill impairment test. Based on this analysis, the study shows that
corporate disclosure could be a “litmus paper” able to test the degree of good faith with
which each firm has implemented IAS 36 requirements.
AMP-HTML Validation Issues and Fixes ------------------------------------- PASS